Archive for the ‘Andy’s Market Report’ Category

June options expiration is behind us and it ended in the bulls favor. The S&P 500 just came off the best week of 2012, only to have another rally this past week of 1.3%. But, that does not mean we can rest on our laurels because now we have what could be the biggest event of the summer upon us – the Greek elections.

European leaders have basically pleaded with Greece to reject the leftist SYRIZA party as the party promises to reject what would certainly be punishing terms from the 130 billion euro bailout offered by the EU.

The bailout will not be renegotiated, warned German Chancellor Angela Merkel, whose country’s wealth is vital to shoring up its weaker partners in the bloc.

But many in Greece and beyond state that Greece’s lenders are bluffing when they threaten to turn off the funds if Athens reneges on the terms of the bailout – tax hikes, job losses and pay cuts that have helped condemn the country to five years of record-breaking recession.

So, the question is how will the outcome on Sunday affect the U.S. markets? The answer is easy….no one knows.

The only certainty is the gap from 6/6 in the SPDR S&P 500 ETF (SPY) has yet to close. A move back to $129.36 would close the gap.

Moreover, the DOW just pushed above its 50-day moving average. A continuation of that trend has proven positive over the next 6 months, but a failure as seen by an almost immediate push back below the 50-day has been rather volatile for the market.

According to Jason Goepfert of Sentimentrader.com, “when the Dow was lower after it rose above its 50- day moving average, then the next six months were positive 55% of the time”. But the swings ranged from up 22.7% to lower -15.8%. I think we could see much of the same as we enter the summer doldrums. Low- volume allows for widely vacillating markets and that is exactly what we tend to see during the months of July, August and part of September.

As for the short-term direction of the market, most of the major indices are nearing a short-term overbought state. This means that a pullback (1-3 days) is anticipated. Furthermore, the day following options expiration, particularly a triple witching event is historically bearish. However, with the Greece election Sunday I think all of the historical precedents should be tossed aside.

If we do see a push higher at the open Monday I would not be surprised to see an immediate sell-off. Remember, things aren’t so great in the U.S. economy right now. I am amazed how the poor jobs report reported only a few weeks ago has been forgotten.

The best thing you can do right now, stay nimble. Expect volatility and don’t be surprised by a nice “summer doldrums” sell-off.

The market experienced its worst week of 2012 on the back of a worse than anticipated unemployment report.

The S&P 500 fell 1.6% to 1,369.10, extending its weekly drop to 2.4%. The Dow slumped 168.32 or 1.3%, to 13,038.27 Friday.

Employers added 115,000 jobs in April, the Labor Department stated on Friday. It was the third straight month in which hiring had slowed, intensifying fears the U.S. recovery is truly losing momentum.

In addition, even a slight drop in the unemployment rate to 8.1% had a dark tone because the fall was due entirely to people dropping out of the workforce.

“The bottom line is you don’t have evidence that this economy has reached escape velocity,” said Robert Tipp, an investment strategist at Prudential Fixed Income.

Analysts had expected 170,000 new jobs in April, and the shortfall could open the door a bit wider for the Federal Reserve to step up efforts to help the economy with another round of quantitative easing.
The employment report included another ominous numbers. The participation rate, a measure of how many Americans are looking for work, fell to a 30-year low at 63.6% of the population.

But kicking the can down the road once again isn’t the ultimate answer. The economy is not growing as fast as needed and with continued woes in Europe there could be another rough road ahead. This of course is just speculation, but when stripped down to its core the economy does not look promising over the coming months.

Technical Mumbo Jumbo

The S&P pushed through 1370 and is now on track to hit 1350. If the major market index is able to push through that level I would expect to see a test of the 1290 area. However, I do expect to see a short-term bounce over the near-term only because of the oversold nature of the market. But, once that kicks back into a neutral state which might only take half a trading day, I expect the selling to start back up.

Remember, sell in May is upon us and I expect to see the historical norms to once again play out this year. One of the perks is that volatility as see by the VIX, VXX and VXN should increase which should afford some great opportunities to sell premium.

The economic calendar is light next week, but elections in Europe should stir the market pot during the early part of the week. One thing is certain next week should be very interesting…possibly the most interesting week of the year.

Spring is here in Vermont, well, almost. The recent two feet that resides outside my window is Old Man Winter’s last attempt at redemption after a poor showing this past winter. The market has essentially rallied for three straight months, but May is upon us and we have all heard the old adage “sell in May and go away’. Here are just a few stats that tend to back-up the phrase spoken frequently among traders and Wall Street over the past few weeks.

May is historically one of the weaker performing months. It is something to consider over the intermediate- term in this already overextended market. I looked at the historical average return of the S&P on a monthly basis over the last 60 years to see if actually backed up typical range-bound summer months also known as the “summer doldrums”.

The Stock Trader’s Almanac states that a $10,000 investment compounded to $544,323 during the November-April period over the last 56 years compared to a $272 loss for May-October. I think that sums up the significance of the historical period known as the “Summer Doldrums”.

Keep this in mind as we move into the summer months. Corrections happen. Flat periods happen. The market can’t continue to advance in this manner without corrections and lengthy consolidation periods. This is the nature of the market. Consider learning alternative investment strategies as a way to diversify your current portfolio so that you are better equipped in any market environment, bullish bearish or neutral.

Market Comments

U.S. stocks fell, sending the S&P 500 to its first back-to-back weekly decline since November, after employers added fewer jobs than estimated and investor concern over global economic growth intensified. The S&P 500 declined 2% to 1,370.26, its worst week since Dec. 16. The decline came even as the benchmark index for American equities had its best two-day gain of the year on April 11 and 12, sparked by optimism about earnings and signals from the Federal Reserve that interest rates will remain low. The Dow lost 210.55 points, or 1.6 percent, to 12,849.59.

All 10 groups in the S&P 500 also slipped after China’s gross domestic product slowed more than forecast. Financial shares fell the most, sinking 2.8%, as Bank of America tumbled 6%. Apple sank 4.5% for the biggest weekly loss since October.

“There are still macro concerns that are weighing on the market right now,” Joseph Veranth, chief investment officer at Dana Investment Advisors in Brookfield, Wisconsin, said in a Bloomberg interview. “Economic numbers haven’t gone off a cliff, but the key is they are a little weaker than people expected,” he said. China and Europe “are concerns for us as part of the overall puzzle.”

Worries over the health of Spain came to a head on Friday after it was reported net borrowing by Spanish banks from the European Central Bank surged to 228 billion in March from 152 billion in February. The news sent Spanish CDS up to a record high, and caused its 10-yr yield to climb back above 6.00%.

Technical Mumbo Jumbo

The top that has been forming in the S&P 500 since mid-March looks quite bearish at the moment. Thursday surge followed by a sharp decline Friday really took the bulls by surprise and took the air out of their sails.

However, if the bulls can manage to muster one last push through 1400 then a case for continued bullishness can be made. Until then I will be watching carefully to see if the S&P can push below 1350 and then 1330. If we see a decline through 1330 then test of 1300 looks likely.

The S&P 500′s loss for the week of 0.7% was its biggest weekly decline of the year as yields on Spain’s debt climbed higher and its equity market hit lows not seen since the height of the euro zone’s crisis last year.

But the question is, will this past week’s losses carry into next week? Is the latest decline a sign of things to come?

Well, on Friday the U.S. Labor Department said employers added 120,000 jobs, the fewest in five months and less than the median economist forecast of 205,000 economists’ predicted. The amount had exceeded 200,000 for three straight months.

“This is a real shock,” Donald Selkin, the New York-based chief market strategist at National Securities Corp., which manages about $3 billion, said in a telephone interview. “Everybody is so hung up on the 200,000 increase.”

After the S&P 500′s rise of about 30% since October, there is concern that buying interest is not strong enough to drive further gains, particularly after soft March U.S. employment figures were released on Friday.

“It seems like we’re hitting resistance,” said Jack Ablin, chief investment officer of Harris Private Bank in Chicago. “I think the market will grind higher, but it will be at a much slower pace. Earnings and jobs aren’t helping.”

But earnings begin next week and they are definitely the wild card for how the market will perform over the next month or so.

Warnings have dominated the pre-earnings season. Of the 121 pre-announcements, 68% are negative ones, compared with 58 percent in the first quarter a year ago.

“Earnings are expected to be weak this quarter, and if you strip out Apple, the picture is even worse.

That could be a big headwind, especially at a time when the macro environment is less than friendly.”
One thing is certain, with futures already down over 1% heading into next week we should be in store for some much needed volatility.

The March options expiration cycle ended without much fanfare, but not after reaping a respectable 2% gain. All of the major indices saw gains exceed 2% with the small-call Russell 2000 being the exception. The market has now pushed higher nine out of the last ten weeks. The Nasdaq and S&P 500 have led the way all year and are now higher on the year 17.3% and 11.7%, respectively. Both have also pushed above key levels. The Nasdaq sits above 3000 and the S&P is now above pre financial crisis levels trading over 1400.

There is no doubt that this rally has been one for the ages. For instance, last week marked the first time the S&P closed below its 20-day moving average. The streak: 52 days. It was the second longest streak of all time. The last time such a streak occurred – 1944!

Moreover, last week broke the 1% daily decline and ended the 10th longest such streak. If that wasn’t enough, last week also saw the first “90% down day” this year. Another historical streak. We can all thank the slow and steady rise in the market for the historical accomplishments.

“We are seeing this unbelievable rally in the market and yet the market is unbelievably complacent. We haven’t been this bullish for a long time,” said Randy Frederick, director of trading and derivatives at the Schwab Center for Financial Research, based in Austin, Texas.

But, where are we now? How will the market fare over the next few months? Are there any historical precedents that we should be aware of going forward?

Well, I am not a prophet. I can’t predict the future. But, I can tell you how the next few weeks fare on a historical basis. Hopefully this will give you a “heads up” as to what to anticipate going forward.

The day after expiration is typically bearish. March is no different; in fact, the week after expiration has seen the Dow down 15 of the last 24 years. But weakness continues throughout the rest of the month. The end of March is actually one of the weaker periods for the stock market.

Will it happen again this year? No one knows for certain, but with Apple making up roughly 18% of the Nasdaq 100, when the tech behemoth’s parabolic move comes to an end we should see a sharp decline in not only the Nasdaq, but the S&P as well. Remember, since the latest rally began Apple has managed to tack on approximately 54%. Yes, 54%. I am very curious how the largest company in the universe manages to be mispriced by several hundred billion dollars. Yet, Wall Street analysts keep pushing estimates higher.

My thought – we will be discussing this magnificent run five years from now when Apple is trading with a market cap far below $500 billion. Like its predecessors in the exclusive $500 billion club, it is my opinion that Apple will eventually suffer the same fate.

But don’t just listen to me, listen to what the market is saying.

While the investor’s fear gauge, VIX has been sliding to five year lows, the expected volatility in Apple has increased, judging by a VIX index that tracks Apple options. Apple, like IBM and other bellwether names, has its own VIX index.

The CBOE Apple VIX index , which measures the expected 30-day volatility of the underlying shares of Apple, jumped 35 percent this week, suggesting more gyrations ahead as more investors speculate on short-term moves.

The end of March should be very interesting. April is typically a strong month and then we enter the “sell in May” period. One thing is certain, 2012 should be one for the record books. I can’t wait to see how it plays out

The bulls were once again successful in pushing the market higher this past week. It marked the ninth advance in ten weeks. The S&P 500 is already 9.0% higher year-to-date and the Nasdaq 100 is up a staggering 14.7%. The bulls have been in control since December 19th, in what has been one of the most persistent rallies in market history.

This past week did have some significance for the bears. Trading on Tuesday was relatively dramatic in that the S&P 500 fell 1.5% to suffer its worst one-day drop in almost three months. The action came on the heels of weak action abroad, where markets remained concerned about the implications of slower growth in China and news that Eurozone GDP declined by 0.3% in the fourth quarter, unrevised from its preliminary reading. The disconcerting macro picture came as the stock market began to show fatigue during its run to a new multi-year high in the preceding week.

Widespread weakness and concern that stocks were possibly setting up for a correction caused the VIX to spike more than 15%, putting it back near its monthly high.

However, the pullback was short-lived as the market bounced back over the next three trading days. It was the best string of gains in over three months. So, for now, the bulls reign supreme.

Friday also marked the three-year anniversary of the S&P 500′s plunge to a 12-year low, a move that was followed by a sharp rally. The S&P 500 still is up 102 percent from that low.

“Everyone’s looking for a correction here, which just tells me we’re probably going to have another little run up before we get that correction,” said Scott Billeaudeau, portfolio manager at Fifth Third Asset Management in Minneapolis.

Technically speaking, the market is hovering near key resistance levels, which could influence next week’s direction. A push above 1,376 by the S&P 500 could suggest further gains ahead, while holding at or below that level could indicate a continuation of Tuesday’s selling.

Moreover, we have a short-term overbought in all of the major indices, although that indicator hasn’t really worked well so far this year. Furthermore, almost every indicator I follow has once again pushed into a short-term overbought state.

If the aforementioned bearish technical were not enough, we are entering into one of the weakest stretches on a seasonal basis for the market.

My thought is that we will see a choppy to lower market over the coming weeks. Trade accordingly and remember, trade small and trade often. Always, use position-sizing as your most important risk- management tool.

January’s rally was admirable. Its perseverance frustrated bears. The infrequent single day declines maxed out at -0.6%.

And the last nine days of the month were more than mind-numbing for most traders as the market traded in a very tight range.

There’s no doubt the bears are ready. Almost every technical and sentiment measure I follow has pushed into a bearish state. Typically, I am ecstatic by the weight of the bearish measures, but it seems everyone is aware of the measures and have joined my short-term bearish camp. And when the herd is anticipating something a bearish move might have a hard time coming to fruition.

That was certainly the case last month.
We must remember that January is one of the strongest month of the year for the market. February not so strong with a historical return of 0.0%.

February swoon? Not yet.

After Friday’s unemployment report, the bulls managed to push the indices, particularly the Dow to highs not seen since before the financial crisis in 2008. A drop in the unemployment rate to its lowest level in three years (8.3%) propelled stocks.

“In this economy only one variable matters right now and that variable is employment,” said Lawrence Creatura, an equity portfolio manager at Federated Investors.

“This report was great news. It was beyond all expectations, literally. The number was higher than even the highest forecast.”

After three months of gains a decline seems the likely scenario. Again, almost all technical and sentiment measures have reached short to intermediate-term extremes, but will they win out for the bears or will the mighty power of the bulls push through the consolidation that has lasted nine long trading days?

Talented analyst Jason Goepfert of Sentimentrader.com recently stated that when “the S&P 500 closed at a six-month high with volume 10% off its low from the past month (as it did on Thursday), then the next two days were positive only 12 out of 46 times.”

Out of the 12 positive occurrences, only twice did it advance more than 1%. Thirteen times it closed with a loss greater than 1%.

Another interesting stat provided by Mr. Goepfert is “the last 8 Fridays when the Nonfarm Payroll report was released” all have closed lower than the prior trading day.

In fact, if you went back to September 2009 and purchased shares of the S&P and sold at the close of the trading day you would have only made a paltry 1%.

Couple the aforementioned studies with short-term overbought readings in three out of the four major indices and I expect to see a short-term pullback over the next 1-5 days.

The two best performing days (on a historical basis) in February are now behind us and now we are entering into a period of bearish seasonality.
Just more food for thought.

Well, some of you asked for it and now look what you get in return – low options premium. Sellers of options need volatility, we thrive on volatility. Volatility is our friend.

But volatility is at a six-month low, which raises hopes that a calmer market will bring in more investors. There is certainly no doubt that most risk is tied up in bonds right now, but once investors are willing to take on more risk they will move back into the stock market. The question is when.

“Lower volatility is like a security blanket for retail investors. It allows them to invest for the long term,” said Ben Schwartz, chief market strategist at Lightspeed Financial, the retail broker. “Investors remain nervous about the eurozone crisis, but money is beginning to trickle back.”

Although investment banks and their institutional clients are not convinced that volatility will remain low. Because, low volatility equates to a low-price hedge against a sharp market decline.

“With Vix levels so low, this is a good time for investors to put on hedge positions,” said Pankaj Khandelwal, a senior Vix trader at Barclays Capital. “Even if you have a bullish view on the market, you can buy downside protection for your portfolio at low prices right now,” said Pankaj Khandelwal, a senior Vix trader at Barclays Capital.

And the smart money or commercial hedgers (among the largest traders in the market) have gone net short on Nasdaq, Dow and Russell 2000 futures.

This is telling.

Because when commercial hedgers move net short the market typically witnesses a correction shortly thereafter.

Whether or not we see a decline soon is THE hot question right now.

For the last three weeks it’s been like the movie Groundhog Day. Every day I wake up and market moves higher.

But the bearish indicators are piling up. But the tower of stacked pennies inevitably falls when it does – it typically comes crashing down.

Unless, we have truly entered into a market environment where investors are moving money off the sidelines and into the market then this bull run could continue. But the numbers just aren’t there. Volume is incredibly low and has been throughout the majority of this bull rally.

Has it been a bear trap all along?

Maybe so, maybe not, but one thing IS for certain, with the market at these elevated levels the risk is to the upside. Trade accordingly.

Numerous downgrades from Fitch, Moody’s the S&P and more importantly the World Bank, more European woes, news of inevitable Greek default, financial sector struggles, among bearish technical and seasonal readings hasn’t helped the bears at all during 2012.

As a result, the market has managed to advance on ten of the past twelve trading days leading to gains of 4.6% in the S&P 500, 4.1% in the Dow and a staggering 7.0% in the Nasdaq – in three weeks, yes, three weeks.

If you tack on the gains since December 19th, when this rally started, the gains are even more impressive as they reach over 9% in the S&P.

Are all of these gains really sustainable?

I think we all know the answer to that question. But, just in case you are unsure, just look at the list of indicators at extremes that are now bearish for the market.

Tack on almost every ETF I follow in a “very overbought” state and you can see why I am leaning towards the bearish camp.

And next week could be the week for the bears. Not only do we have some key earnings plays coming up out week including Apple, but the Fed is also supposed to give us some insight into where they think the economy is headed.

If all of the aforementioned information wasn’t enough to at least make you reconsider being at least a short-term bull, the week after options expiration is historically bearish.

There is no doubt, the risk is to the upside at this juncture. If you were not privy to the stats I provided last week by the wonderful sentiment analyst Jason Goepfert
of Sentimentrader.com he recently stated the following:

“Starting around the 2nd week in January, stocks have had a consistent tendency to weaken. Or at least not show much strength. Especially technology.

I don’t want to hammer on this too much. Seasonality is a tertiary indicator at best, and can easily be overwhelmed by fundamental developments, technical breakouts and changes in sentiment.

The performance of various sectors since the day honoring Martin Luther King, Jr. became an exchange holiday in 1998. The performance of QQQ was positive only 1 out of 11 years into the end of the month.”

He goes onto to provide a wonderful chart that shows sector performance after the MLK holiday and the Nasdaq 100 only has a 9%, yes 9% chance of closing higher than its price level before the holiday.

The bears are already in the whole 2.0% and almost 3.0% on the S&P and Nasdaq, respectively so in order for history to repeat itself the bears better start getting to work.

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